AAPL FYQ1 $0.20/Sh Lost to Components, Derivatives, Says Wells

By Tiernan Ray

Wells Fargo‘s Maynard Um this afternoon reiterates an Outperform rating on shares of Apple (AAPL), and a $600 to $630 “valuation range,” after perusing the company’s 10-Qfiling on Thursday with the Securities & Exchange Commission for the fiscal Q1 reported last Wednesday, and turning up some clues as to diminished profit.

That report, with revenue slightly less than expected, and earnings per share falling year on year, prompted a sell-off of 12% in Apple shares the next day.

Um thinks about 20 cents disappeared from last quarter’s report because of “deferred margin on component sales” and because some derivatives instruments used by Apple to manage cash flow in the quarter had adverse results:

Deferred margin on component sales increased $101MM sequentially, which we estimate adversely impacted gross margin by about 20bps or $0.08 in EPS. We believe a reversal is likely in the next qtr, which could benefit gross margin by about 70bps or $0.25 if it reaches levels to that of the June qtr. In our view, the timing of the component purchases is key to understandingwhether this is a bullish sign for units into the March qtr (and not reflected in guidance) or a function of inventory not burning off relative to expectations [...] Apple recognized a $150 million derivative instrument loss that was reclassified from Accumulate Other Comprehensive Income to net income for cash flow hedges, the vast majority of which impacted cost of sales. We estimate this had about 30bps adverse impact to gross margin ($0.12 to EPS) and note thatin the prior four qtrs Apple had gains, making this seq. comparison more difficult.

There were some other effects upon gross profit margin that were less surprising, writes Um, including a 53-cent hit from the company having “over-accrued for warranties” in the quarter, perhaps reducing gross margin by 120 basis points: “accrued $673MM more than it expensed, vs. a $73MM over-accrual in Sept. and $436MM over-accrual in Dec. 2011 qtr). This was anticipated given several new product launches.”

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There are 3 comments

JANUARY 28, 2013 5:30 P.M.

meme wrote:

aapl headed in a 2 down- 1up pattern to test 400

JANUARY 28, 2013 5:34 P.M.

Will wrote:

Why don't you write something new and not
from last weeks earnings? It seems you can't
get enough of bashing Apple? Why don't
you tell the truth about year over year
comparisons by stating that last year
contained 14 weeks vs 13 weeks last week? Why
don't you publish report that mentions
Fast Money and Carter Worth' call tonight
that Apple has bottomed and is now heading
to 550? Carter Worth is from UBS. Look
forward to your next write up!

JANUARY 28, 2013 5:48 P.M.

Ed wrote:

Yesterdays news! Find something worthwhile
to write about. This constant bs on Apple
is just that, BS. Did Steve Jobs or Tim
Cook hurt your feelings in the past? Sure
seems it

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.